The government heralded Royal Bank of Scotland's exit from the scheme set up three years ago to insure its most toxic assets as a step towards releasing the bailed out bank from taxpayer support.

Amid regulatory pressure for RBS to embark on another shrinking of its business, chancellor George Osborne said the bank's exit from the so-called asset protection scheme (APS) meant that taxpayer support for the industry had fallen sharply.

Even so, some £45bn of taxpayer funds are locked up in RBS shares and £20bn in Lloyds Banking Group, which has already paid £2.5bn to leave the insurance scheme.

RBS, 81%-owned by the government, has also now paid £2.5bn for the APS set up in 2009 when the banking system was rocked by uncertainty about the potential losses from bad loans which drove the bank's shares to just 10p – the equivalent of 100p after a share rejig earlier this year. The bank's shares closed up more than 2% at 286.1p

The taxpayer has now made £5bn of profit from the APS and an additional £1.5bn from fees paid by RBS for other liquidity schemes.

Osborne said: "The government's strategy remains to return RBS to the private sector when it is value for the taxpayer to do so. Today is a step in that direction."

Stephen Hester, the RBS chief executive, who is now facing calls from the Financial Services Authority to sell the US arm Citizens, described the exit from the APS as a "milestone".

"We all want a system in which banks will never again need to seek credit support from government in a financial crisis. Huge progress has been made towards that goal and our exiting the APS is a significant milestone in RBS's recovery," said Hester.

"The APS has played a valuable role, buying time for the bank as we implemented change from the worrying days of 2009 to create the much stronger institution it is today," Hester added.

Some £282bn of troubled loans were first insured by the APS but this has now fallen to £105bn as the loans have been sold off. Hester stressed that despite the reduction in the bank's balance sheet, RBS remained "wholly committed to supporting its customers in the years ahead".

The loans for UK customers have risen since 2008 but by just 4%.

The exit from the APS means that taxpayer support for banks – which needed liquidity during the banking crisis – has fallen by over £450bn. "The bank's exit from the APS demonstrates the progress RBS has made in transforming a balance sheet that had become dangerously large and unstable into one that is more conservative, resilient, and sustainable," RBS said.

Sandy Chen, analyst at Cenkos, said: "APS served its purpose, providing loss protection and boosting capital ratios when it was most needed. Thankfully, that time has passed, and the RBS management team have cleaned up a lot of the mess left behind in 2009."

However, he said RBS needed to "generate decent growth and profitability as it continues to shrink its balance sheet" against challenging economic backdrops.